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Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves the reorganization or consolidation of debt which allows a debtor or individual to pay off debt over a period of time. Chapter 13 is sometimes referred to as a wage earners bankruptcy. Under a structured plan, you make payments to the Chapter 13 Trustee who passes along those payments to your creditors. The maximum length of time for a Chapter 13 bankruptcy is 60 months from confirmation of the plan.  The filing of a Chapter 13 bankruptcy generally stops garnishments, levies on bank accounts or other property, immediate repossessions, attachments of liens, and executions.

There are two main reasons that an individual might consider a Chapter 13 bankruptcy. First, in most cases, Chapter 13 allows an individual to keep certain secured debts they wish to maintain; for example, debt on houses, real estate, vehicles, or other property even though the individual may be behind on the payments to the creditor. Second, your property will not be sold even if the property has considerable equity. 

In Chapter 13, your payment is calculated and set by the Court based on your income, expenses, assets, and liabilities. Many individuals qualify to get a very reasonable payment and the end result is that you pay only a percentage of your unsecured debts such as credit cards, charge cards, department store cards, medical bills, deficiencies from foreclosure on real property, repossession of vehicles, unsecured bank loans, payday loans, check loans or any other type of loan where there is no collateral. This plan makes your debt more manageable and gives you a greater ability to pay more important debts, such as those on your car and house.  

All of your secured debt will be paid off over the plan period with the general exception being the debt on a home. If you have a house payment, you resume the payment to the mortgage company or bank after the plan period is completed. Of course, if you are current on your payments at the time of the filing, then the house payment may be paid directly to the mortgage company. This is an exception to the general rule that all other secured debt must be paid to the Trustee through a plan. 

Another good reason to choose Chapter 13 bankruptcy is when there are co-signers who need to be protected. If you are having difficulty with co-signed loans, those loans may be put into a special status where the banks or finance companies may not sue the co-signer.

IRS debt and student loans may also be included and paid in a method through the plan to stop penalties from accumulating and wage garnishments to ceased. You should also start receiving IRS refunds in the future. 

The Automatic Stay in Chapter 13

Upon filing a Chapter 13 bankruptcy, a federal injunction or restraining order is automatically issued which stops all collection efforts by creditors. This is referred to as the automatic stay. The automatic stay protects you from creditors taking further steps to collect a debt while you are involved in bankruptcy proceedings. If a creditor continues collection efforts against you after they have been advised of the filing of a Chapter 13 bankruptcy, you will need to advise your attorney so they may take steps to stop the creditor.

Credit Management Companies or Programs

Some people attempt to consult with a credit management program company. Most of these companies claim that they will pay your debts over time, a process which sounds similar to a Chapter 13 bankruptcy. We have had numerous clients indicate that after being in these programs, their creditors are not being paid. Unless all creditors agree to participate in these programs, you may find that there are debts that are not paid even after you have made payments for several years. A Chapter 13 bankruptcy is different because there is a Court which enters an order at the end of the plan period discharging debt. In other words, unpaid unsecured debts are wiped out at the end of your Chapter 13 bankruptcy. 

Can I Keep My House in Chapter 13?

In Chapter 13 bankruptcy, you have an absolute right to keep your house. You do not have to be concerned about having equity in your principal residence. It cannot be sold by the Chapter 13 Trustee. Of course, you must be able to make the payments in the case, but the fact that you have excess equity only affects the payment as to unsecured creditors. 

You can stop foreclosures as long as the bankruptcy is filed before any foreclosure sale date. You will usually see ads in the legal notice sections of the paper, and in the event you have this happen, you need to contact us immediately.

In many cases, if you are current on the mortgage when you file, you continue making the mortgage payment directly to the mortgage company. If you are behind on your mortgage payments, a payment is calculated to satisfy the amount you are behind over the course of the plan. At the end of the Chapter 13, you would go back to making the regular payment to the mortgage company. 

Can I Keep My Car or Vehicle in Chapter 13?

If you have possession of vehicles financed at the time of filing a Chapter 13, then you can keep those vehicles which are necessary for reorganization.  This means that the vehicle is placed in the plan so that payments may be paid out over the plan period, which is usually 60 months. The creditor cannot repossess the vehicle because you are in Chapter 13. You might receive an objection to your plan due to the fact that the creditor wants a greater monthly payment, but in most cases, we can work out acceptable terms. 

In the event that you had more vehicles than you needed, a different issue might arise. For instance, a single person, in all likelihood, does not need three vehicles which are all financed. Still, if you can make the payments, you may be able to keep all three vehicles, especially if you are paying all of your unsecured creditors. If you wish, you may choose to surrender a vehicle to the lender.  

Maintaining Insurance on Vehicles in Chapter 13

You must have full coverage insurance on all vehicles on which you still owe or which are financed. If this is the case for you, please provide our office with a declarations page from your insurance company. The declarations page should show full coverage and the loss payee (lienholder). In the event that you do not have insurance, the Trustee will force place insurance on your vehicle. This force placed insurance covers only your vehicle and is not full coverage insurance. The fee for this insurance will be added to your Chapter 13 payment.

What if I Pledged Other Property?

Finance companies generally will obtain a lien on certain types of personal property which you have in your home. These liens are usually proposed to payout in the plan over the 60 months. Some items, which are purely household items, may be exempt and avoided by the Court. This means you could keep the items and the lien would be removed.

Determining the Payment

You really need to sit down with one of our staff members to best determine the payment you can afford. We have over 30 years of experience in calculating Chapter 13 payments and we will do the best we can to organize and accommodate you in a plan that best serves your particular budget. We understand that everyone has a different budget.

The Plan Payment and Payroll Deduction

All of your bills are grouped into one plan payment which is disbursed monthly to your creditors. If you are employed by an employer who pays you a regular paycheck, then the Chapter 13 Trustee usually wants payroll deduction of the Chapter 13 monthly payment. In these cases, your Chapter 13 monthly payment would be divided among each of your paychecks depending on how often you are paid. You do not have to agree to this but the Trustee may recommend it. 

Of course, if you are self employed, on disability, or your employer is considered a small employer with only a few employees, then you will most likely have to make the payment directly by money order or certified funds. 

IRS and Chapter 13

Most of the time debts owed on IRS taxes that are less than three and one-half years old from the filing of the return cannot be discharged. In Chapter 13, you have the ability to pay off your tax debt over a period of years. You will, of course, need to file all future returns, and the IRS does not usually take future tax refunds while you are in an active bankruptcy case.

In some cases, older tax debt can be discharged, and the IRS may file an unsecured claim on parts of the debt depending on the age of the debt. This may allow you to have a much lower payment. A Chapter 13 definitely stops further levy or attachments and prevents future IRS penalties after it is filed.

Student Loans in Chapter 13

Student loans cannot generally be discharged in a bankruptcy unless there is an ‘undue hardship’. In these cases, a separate lawsuit must be filed to discharge the debt. It is rare that a case can be made to erase these debts under the ‘undue hardship’ argument. Therefore, you will probably have to pay your student loans through Chapter 13.  

You can, however, propose a lower payment on the student loans through your bankruptcy plan. At the end of the Chapter 13, if there is additional money owed to your student loan companies, you will still be responsible for this debt.

Marital Debt in Chapter 13

It is possible to discharge debts which are debts owed in a divorce either from an Order or a Marital Dissolution Agreement if the debts are from a separation of property and are not in the nature of support such as alimony or child support.

Rent to Own Contracts

In these types of contracts, you do not own the property but you are leasing the property. You must continue to make these payments, outside of the Chapter 13 payment, if you wish to keep the items.


After completion of the plan period, the Chapter 13 is discharged. Creditors are discharged that may have been owed additional money. You are not required to pay these debts. Any action to collect a debt included in your Chapter 13 after discharge is in violation of the discharge order of the Court.  This would constitute contempt of Court by the creditor, and a separate action could be brought on your behalf to collect damages. 

What to Bring to Your Appointment

  • Tax returns from the last 2 years (if you were required to file)
  • Pay stubs from the last 6 months
  • Drivers License or Government Issued Photo ID
  • Social security card 
  • List of all debts including the name of the creditor, the address of the creditor, the account number and the current balance
  • A declarations page from your automobile insurance company (if you are filing a Chapter 13)

Credit Counseling / Financial Management

There are two required classes in our district. The credit counseling class has to be completed prior to filing a case and can be completed by telephone or online. The financial management course is completed online at the end of the five year plan.


This is a general outline of the basic principles and differences between Chapter 7 and Chapter 13 bankruptcies. It is not intended to be a substitute for sound legal advice from an attorney. You should make an appointment with our office to discuss financial problems so that we can advise you based on your particular situation. We offer a free consultation.

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We are a debt relief agency.  We help people file for bankruptcy relief under the bankruptcy code.